Billion-dollar companies used to be so rare, they developed a name for themselves: unicorns.
Now, these companies are increasingly common. According to the Wall Street Journal’s “Billion-Dollar Club” list, there are 90 companies with billion-dollar valuations.
And if Uber raises yet another round of financing — it’s rumoured to be raising between a $US1.5 and $US2 billion currently — it stands to become the most valuable private tech company of all time, with a $US50 billion valuation.
Law firm Fenwick & West assessed 37 US-based private tech companies that raised money in the last year at a billion-dollar valuation. Of the companies it analysed, the firm says 25% of financings were led by VC firms; the other 75% were led by other investors (corporate investors, hedge funds, or mutual funds).
The average valuation of the companies the firm analysed was $US4.4 billion, and the median was $US1.6 billion.
There was one thing all of the billion-dollar companies the firm analysed had in common: in each case, investors demanded a liquidation preference, which, if the company gets sold, allows investors to cut the line and get paid before other people, like the company’s founder or its executive team.
It’s low-risk, high-reward for investors: they get paid no matter if the company sells for a price lower or higher than the valuation at which the investor put money into the company.
From the survey:
Investors in unicorn financings have significantly more downside protection than public company common stock investors. These protections are especially strong in the event of an acquisition. For example, CB Insights reported that the 10 highest valued unicorns had an aggregate valuation of $US122 billion and an aggregate invested capital of $US12 billion. Since 100% of the unicorn financings had a liquidation preference, valuations of these companies could fall on average by 90% before the unicorn investors would suffer a loss of their investment, and they could withstand an even greater decline if they had a senior liquidation preference over other series of preferred stock.
Sometimes, startups go public at lower valuations than the ones they were given during their private rounds of funding. Investors can protect against this with senior liquidation preference, which means they get paid before common investors and anyone who holds preferred stock in the company.
Fenwick & West reports that only 20 per cent of the time, this is something investors do in unicorn companies. And only 16% of investors in these kinds of deals demand a minimum IPO price that’s as high as the valuation they paid.